UK inflation rate news: Prices continue to rise

In the year to April 2024, the price of goods in the UK rose by just 2.3%.¹ It’s good news in that this is the lowest rate since September 2021. However, it’s still higher than the 2% target set by the Bank of England. The question is, will the Bank of England raise interest rates, or not?

Understanding inflation

Inflation is simply the word used to describe how an item has increased in price. You’ve already experienced it. For example, if you bought a litre of milk for £1 a year ago, and today it costs you £1.05, then the price has risen by 5p. The inflation rate for this litre of milk is 5%. The same analogy can be applied to anything and everything you buy. 

To measure inflation the government creates a virtual basket. This basket contains all the normal things people shop for. The prices today are compared to what they were a year ago to create an average inflation across the basket. That’s how the UK inflation rate is measured. It’s usually referred to as the Consumer Price Index (CPI). 

Interestingly, the recent low is partly due to a drop in the energy cap, effectively lowering electricity and gas prices and reducing inflation in the process. 

Why prices continue to rise

Lower inflation rates don’t mean prices will fall. Any inflation, even at half-a-per cent, means that prices are rising. The lower the inflation rate the less the prices rise. For prices to fall the inflation rate would have to be negative. Even then, there is no guarantee that suppliers would lower prices. Instead, they would simply not increase them. As long as there is inflation, prices will rise. 

Why is inflation over the government target?

High energy prices and the high cost of food, in many cases directly connected to the Russian invasion of Ukraine, are a result of shortages in the supply chain. These shortages create a demand-orientated market. When demand outstrips supply, prices will rise faster as suppliers can charge more thanks to the level of demand. 

Food, oil, and gas have all been in high demand with lower supplies than usual. The result is higher than normal price increases, causing high rates of inflation. This can hit household finances hard. In general, the lower the income level the harder you’ll feel the effects of inflation.

How raising interest rates helps

Increasing interest rates makes borrowing more expensive. That should make people less inclined to borrow and, therefore, reduce spending. Lowering demand for products can help reduce price rises and supply can outstrip demand. 

However, interest rate rises mean higher mortgage repayments and businesses are less likely to borrow and create jobs. It’s a two-edged sword which needs to be carefully balanced. 

The Bank of England will likely hold interest rates at their current 5.25%, but we won’t know for certain until the 20^th of June. 

Sources

1.    https://www.bbc.com/news/business-12196322

All the information in this article is correct as of the date of publishing. The opinions expressed in this publication are those of the authors Euxton Mortgage Market. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.

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June 2024